The Tax-Free Savings Account (TFSA) is an account that does not apply taxes on any contributions, interest earned, dividends, or capital gains, and can be withdrawn tax free. This savings account is available to individuals aged 18 and older in Canada and can be used for any purpose.
TFSA, which is an extremely popular way of saving money, is indexed for inflation and annual limits vary by year.
The TFSA was first introduced in the 2008 federal budget and became available to Canadians for the 2009 calendar year. The initial TFSA dollar limit of $5,000 had risen to $5,500 for the past few years, and even hit the $10,000 mark in 2015.
Each fall, the Canada Revenue Agency announces the indexation increase for the following calendar year. The “indexation factor” for 2019 was calculated by taking the percentage change in the average monthly Consumer Price Index (CPI) data as reported by Statistics Canada for the 12-month period ended Sept. 30, 2018 relative to the average CPI for the 12-month period ended on Sept. 30, 2017, The FP article said.
The real reason people prefer to invest their savings in a TFSA is that they are tax free. What is essentially means that when you contribute to the TFSA with your after-tax income, it can never be taxed again. This is a great way to ensure your income grows without being held-back by the tax cuts that come with other types of investments. Other reasons TFSAs are great is that they can be withdrawn at any time, and any reasons making them something to turn to in case of an emergency.
As TFSA withdrawals aren’t considered to be income, they don’t negatively impact income-tested benefits and credits, like the Guaranteed Income Supplement, Old Age Security payments or the age credit, experts said. This makes them ideal for almost everyone.
A Registered Retirement Savings Plan, or RRSP, is a special type of investment account designed to help Canadians save for retirement. The main advantage of an RRSP account, as compared to a regular investment account, is the tax benefits it offers.
However, to contribute to an RRSP, you must be 71 years of age or younger and you must have “earned income,” which is typically employment income or rental income. If you opt for a TFSA, there is no age limit and no earned income requirement.
Any amounts withdrawn from your TFSA can be recontributed, beginning the following calendar year, without using up TFSA room. This is something you can’t generally do with an RRSP as you have to have available contribution room, based on earned income, to recontribute amounts withdrawn.
Save wisely and contribute the maximum allowed amount into your TFSA.